I started this blog in June 2007 asking these questions: Are we in a massive asset bubble that will blow up in our faces ??? - ANSWERED YES ! Is western and particularly British society on the verge of social collapse??? What are the best common sense long term investment strategies to keep you rich? When will consumption/debt bubble economics end and a real savings/production economy begin ???

Wednesday, 13 January 2010

The Tally Stick Monetary System - Government gold fixed money based on credit rather than debt

When the government runs out of gold tax money to buy things (rather than borrow money from banks) it simply prints its money as tally sticks.

Thus the government does not go into debt, no national debt is created. No interest has to be paid on the debt and future generations are not burdened paying it. Citizens are not born into debt.

To pay for things ahead of its gold tax take the government takes a polished stick, writes on it an amount of gold and then splits the stick in half. The government keeps one half and the other is 'spent into existence'. The merchant that is selling goods or services to the government will accept the half tally stick as payment because it can be used to pay taxes and can be swapped for gold (remember the gold value is written on the stick) or maybe goods from other merchants. Other merchants accept the stick as legal tender because they can use it to pay taxes just like the original merchant could instead of dipping into his 'intrinsic value' gold savings.

In effect the merchant has already paid some tax 'in kind' rather than in gold by supplying the government with a good or service. The tally stick is a marker that records this and this is why the government will accept the stick as tax payment.

Thus there are two forms of legal tender in circulation: half tally sticks and gold coins. Bad money drives out good and thus gold (with intrinsic value) will tend to be hoarded as savings while tally sticks are used in transactions.

The government will accept gold or tally sticks for payment of taxes. When it gets a stick it finds its other half and tries to see if they match. If they do not (e.g. the wood grain is different) the government knows the stick is counterfeit and starts hunting the counterfeiter. If the two halves match the stick is destroyed.

So what is to stop the government 'printing' too many tally sticks and thus inflating the fiat tally stick currency ? Well as tally sticks lose value people still have their savings in gold and thus do not have them wiped out by price rises. In practice a tally stick based currency can not be inflated ahead of economic growth. Thus inflation of the money supply can only occur in concert with growth. Also the money supply will shrink as the economy contracts. The tally stick money supply is perfectly elastic, expanding as the economy grows and shrinking as it contracts. Inflationary price rises (general rises in prices due to the reduced buying power of money) can only occur if the money supply increases while the goods and services produced by the economy do not (i.e. more money chasing the same or fewer goods and thus 'bidding up' prices).

In a debt based system the government can borrow money into existence ahead of economic growth and thus inflationary price rises occur. The tally stick system is credit based, no national government debt is built up and no inflationary price rises occur.

Tally sticks can't enter circulation until some work is done by someone to produce a good or service. Thus tally sticks can not be printed ahead of the economy's ability to produce stuff. The king can print up as many sticks as he likes and put whatever gold value on them he likes. However he can't get more of them into circulation than there is stuff to buy and he can't set prices in gold. The maximum quantity of the money supply is directly related to the productive capacity of the economy. It is not control by the government or central bank. Free market gold banking (rather than a central bank enabling a cartel of banks to use fractional reserve lending to generate fiat currency) places gold as money and tally sticks as a money substitute. The buying power of gold (and therefore it's substitutes) is set by the market.

Thus the success of tally sticks shows us that not all fiat money is bad. It does not always lead to price inflation and boom bust cycles. The key is whether the fiat money is debt based or credit based. England grew well under the credit based tally stick system for 700 years. However the move to a central bank / national debt system created long term problems. For 220 years (1700 - 1920) England grew to be the biggest empire ever and its monetary system was copied everywhere. The national debt seemed to be able to create massive growth but eventually the debt and inflation ruined the country - mainly by allowing the financing of massive and long global wars.

A debt based system can create money ahead of the economy's productive capacity and can therefore create growth with no extra production. This growth is not real and neither is the demand based on it. Thus it will end abruptly in a crunch i.e. boom/bust. A debt based system simply steals money from future generations so that the current one can live beyond its means. It also allows the government to tax the population by stealth via inflationary price rises.

We shouldn't fear fiat money itself but only fiat money that is created through debt. It is only fiat money created out of debt (ahead of the economy's productive capacity) that generates inflation, boom/bust and a national debt.

In a debt based pure fiat currency system rich countries like the USA (with the reserve currency) can postpone the inflation and debt crises many decades and generations into the future but when it comes the country is destroyed. The international debt based system means the richest country is not the one with the most productive capacity but rather the one that can borrow the most money. In the mean time it is ordinary workers who suffer the burden of the national debt and inflationary price rises ! The fiat Dollar has done well to last 38 years but is failing fast. It will not last 700 years !




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